{"id":542,"date":"2017-04-12T22:22:10","date_gmt":"2017-04-12T22:22:10","guid":{"rendered":"http:\/\/charliemungersays.com\/?p=542"},"modified":"2017-10-24T23:06:59","modified_gmt":"2017-10-24T23:06:59","slug":"78-wesco-2006-lets-learn-part-4-points-19-24","status":"publish","type":"post","link":"https:\/\/charliemungersays.com\/index.php\/2017\/04\/12\/78-wesco-2006-lets-learn-part-4-points-19-24\/","title":{"rendered":"78. Wesco 2006: Let’s Learn – Part 4 – Points 19-24"},"content":{"rendered":"

\"\"<\/a>Excellent Book: Charlie Munger For All Seasons<\/a><\/a><\/strong><\/p>\n

Point 19. Money managers and stock brokers \u2013 it\u2019s not a class where everybody\u2019s wonderful and angels<\/strong><\/p>\n

I said at the Berkshire meeting that the money managers and stock brokers \u2013 it\u2019s not a class where everybody\u2019s wonderful and angels \u2013 but those who tend to come to our meetings I always feel are the class in their group. I think Berkshire and Wesco, in their meetings, attract a very good class of money managers who try to be rational and do a good job and not go crazy. I think that\u2019s why you\u2019re here. It\u2019s kind of like a reaffirmation of the faith.<\/p>\n

Well, with those preliminary remarks, I will now open the field for questions.<\/p>\n

Point 20. [On Some Corporate Behavior] – Oscar Wilde\u2019s definition of fox hunting: Pursuit of the Uneatable by the Unspeakable.<\/strong><\/p>\n

Part 2, Question and Answer Period<\/p>\n

Hello Mr. Munger, I\u2019m Whitney Tilson, a shareholder from New York.<\/p>\n

[Mr. Munger: \u201cI know you well.\u201d] Thank you. My question relates to something you and Mr. Buffett said at the annual meeting last Saturday. Mr. Buffett spoke at length about the need for improved corporate governance and that large shareholders really need to step up and start behaving like owners rather than renters. I forget whether it was in the context of that question that you said something along the lines of activist hedge funds being a mixed bag. It struck me that there might be some inconsistency in those statements because in the past two or three years, virtually every case in which I can think of in which a large shareholder acted like an owner \u2013 the only exception I can think of is in the case of Hollinger and Chris Browne and the Tweedy Browne folks, but even that was an accident and they hope never to be activists again \u2013 the only people who are behaving as you are calling on shareholders to behave are, in fact, these hedge funds. I know what you think about hedge fund fees and that they\u2019re likely to underperform as an asset class \u2013 and I wholeheartedly agree, despite running one of these creatures \u2013 but my question is: at least in the area of corporate governance, shouldn\u2019t you and Mr. Buffett be applauding this kind of behavior (while perhaps holding your nose about the fees these funds charge) and encouraging institutional investors and mutual funds to behave in this fashion.<\/p>\n

Munger\u2019s reply: The reason I said it was a mixed bag is because I regard it as a mixed bag. Obviously, since Hollinger was a total kleptocracy [laughter] \u2013 I mean total; it was the most god-awful example of corporate misbehavior that you could imagine \u2013 and it was contrary to Tweedy Browne\u2019s interests to do what it did, when they cleaned up that mess by wading in big-time, they did the rest of us a favor. So that\u2019s the part of the mixed bag that\u2019s weighted toward the favorable side. But if you take Carl Icahn\u2019s assault on Time Warner \u2013 if you think Carl Icahn really gives a damn about the shareholders of Time Warner\u2026 Tweedy Browne was revolted by the behavior and so they got on a real moral crusade. And they were right, and I applaud that. But a lot of other people just want to raise hell and they don\u2019t care if they\u2019re raising hell with admirable people or knaves \u2013 they\u2019re just trying to make money. That second class is I think a mixed bag that we don\u2019t need.<\/p>\n

I don\u2019t think every corporation in America that could be, on a short-term basis, made to give shareholders a little jump in value\u2026I don\u2019t think every single instance like that ought to be seized by the management or whether shareholders ought to have the power to run around and do it, particularly if they\u2019re the [wrong kind of people?].<\/p>\n

I think I said on a previous occasion that some of these assaults remind me of Oscar Wilde\u2019s definition of fox hunting: he said it\u2019s the pursuit of the uneatable by the unspeakable. [Laughter] In other words, I think some of the hedge fund types are the unspeakable and even when they\u2019re on the right side, the other people are uneatable. But still it\u2019s not an elegant view. The Tweedy Browne thing was a huge blessing \u2013 I\u2019d agree with that.<\/p>\n

Corporate Management and Governance<\/p>\n

Governance is a very tough subject and the truth of the matter is that corporate managements, from shareholders\u2019 point of view, run the gamut from being very valuable, so they add to the asset value of the business they supervise, to very negative, so that the asset value of the business should have a big discount. You know that perfectly well in your own life. One of our fellow value investors said the other day, considering the self-interested way that most corporate managers behave, you ought to get 30-40% more assets than you pay for to allow for the depravations of the people who are running the corporation. [Laughter] That\u2019s a very harsh thing to say, but it\u2019s true in many cases.<\/p>\n

Point 21. (Of Some in Accounting) \u201cWhose bread I eat, his song I sing.\u201d<\/strong><\/p>\n

Compensation and Stock Option Abuse<\/p>\n

There were lots of companies that had something like 50% of all of the outstanding stock subject to options. They couldn\u2019t help it. They were in the high-tech game, everybody else was paying in options, and they needed people like this woman who was making $40,000 per week in options, so they paid in this currency and were just swept along by these crazy practices. Corporate compensation is a weird subject.<\/p>\n

Stock Option Accounting: The Accountants Failed Us<\/p>\n

Again, the accountants failed the rest of us. Never, ever should the accountants have allowed any stock option compensation not to go through the income statement, 100%, all of it. The Washington Post has a subsidiary where they created a phantom stock option plan in which somebody valued the subsidiary as a public company and the employees get options. But they account for that on a full-cost basis, not the way people are now accounting for the cost of stock options, which is to hire phony experts to come up with low values. They resented the fact that options had to be expensed, so they made very foolish assumptions so they could get the charges as low as possible. And they\u2019re still lobbying to try to get Congress in some way to change the accounting back to its former knavish state.<\/p>\n

Accounting Has Huge Consequences<\/p>\n

Accounting has huge consequences because given the competitive pressures in life, you have enormous incentives to report every damn item of income they possibly can. People who are subjected to that kind of temptation need a disciplined supervisory structure, which accounting provides. I feel sorry for my individual friends in the accounting profession who haven\u2019t produced any income for years because of the malpractice fines, but the profession as a whole richly deserves the amount of trouble that it\u2019s had. It\u2019s such a thankless job to want to pull the plug. How many people are volunteering for that? It reminds me of the saying, \u201cWhose bread I eat, his song I sing.\u201d<\/p>\n

Sarbanes-Oxley<\/p>\n

The Sarbanes-Oxley stuff did give us a little bit of supervision over accountants but what they\u2019re doing mostly is running around improving internal controls, which is a gold mine for the accounting firms. Companies need bodies and the accounting firms are billing those bodies at very high rates (despite the quality of some of them), so it\u2019s been a bonanza for the accounting profession. And I think better internal controls are ultimately good.<\/p>\n

Point 22. Bad Accounting: A Cause Of The Enron Disaster<\/strong><\/p>\n

But some of the big stuff is being ignored. I had fun once at the Stanford Directors\u2019 College [a program at Stanford University to train corporate directors on how to be good directors] \u2013 I asked them, \u201cName the time when that whole Enron thing could have easily been stopped?\u201d People utterly failed \u2013 they should have done better. A whole bunch of experts paid thousands of dollars to come to the college, but not one person stood up with the correct answer, which is: that when Skilling got to SEC and talked them into allowing them to front-end all future profits from long-term arrangements to deliver natural gas and the income immediately went to the trading desk. This triggered a whole daisy chain, with all of its misery and terrible example. And all they had to do is make that one decision right instead of wrong. What I\u2019ve said is totally obvious, but I don\u2019t know how many other people realize it \u2013 and this is a smart bunch. It\u2019s so easy to realize how all of this sin and error could be fixed by proper accounting. Yet the skilled people like Skilling and Arthur Andersen went to talk to the skilled regulators who are the accountants at the SEC and they made the exact wrong calls.<\/p>\n

There\u2019s a lot to be fixed in the world. To the extent that this is an educational meeting, I think the story I\u2019ve told you is giving you a real educational lesson. It would have been so easy\u2026yet the method they chose was so insane. I\u2019ll give anybody with any understanding of traders and trading culture and management consulting and management consulting culture, how could anyone believe that that kind of accounting would be anything but a disaster?! There\u2019s so much skill in exposition in this stuff. Look at Johnnie Cochran. There\u2019s just a huge amount of skill in exposition. And part of being a wise person is resisting the other person\u2019s expository \u2013 to know nonsense when you see it. If you\u2019re like me, you can conceal your contempt for the person even as they speak. [Laughter]<\/p>\n

I think we can offer a certain forgiveness. It reminds me of the [?] who was confronted<\/p>\n

with the scandals of the Catholic church. He said, \u201cWell, I\u2019ve had my scandals too. It just happens because of our different doctrines. Most of mine are heterosexual.\u201d<\/p>\n

[Laughter] And I said, \u201cWell, I can understand why the Catholic church got into so much trouble, because of all of the religions, they\u2019re the one that\u2019s most into forgiveness. A person can be redeemed. How about you?\u201d And he said, \u201cOh Charlie, I forgave every single one [because of what\u2019s it\u2019s like to live somewhere else?].\u201d Well, that\u2019s the wonder of forgiveness. [Laughter]<\/p>\n

Point 23. (On Investments) \u2013 Complex Models Can Lead To False Confidence<\/strong><\/p>\n

COMMENTS RELATED TO BERKSHIRE HATHAWAY<\/p>\n

Comments on the Reinsurance Business<\/p>\n

I think the reinsurance business is a very difficult business. And it\u2019s a very tempting business, in which a guy writes you really large checks in advance. That kind of field will lead to a lot of dumb stuff and a lot of calamities. It takes exceptional skill to do well in reinsurance over the long term. Few people can do it. So you might ask, Why do we think we can do it? Well, we\u2019re not everybody else. [Laughter] If you stop and think about it, that\u2019s the only logical answer. The only other alternative is that we\u2019re nuts, a possibility you\u2019ll have to consider. [Laughter]<\/p>\n

What is Berkshire\u2019s Formula for Pricing Super-Cat Insurance?<\/p>\n

The answer is, there is no formula. Ajit [Jain] and Warren are like father and son in how they interact. They\u2019re like a couple of bridge players. Anything they want to do is okay with me. You should be so lucky to have Ajit Jain and Warren Buffett doing this for you.<\/p>\n

What Investment Hurdle Rate Do You Use in Your Models When Deciding<\/p>\n

Whether to Make an Investment?<\/p>\n

We don\u2019t do a lot of involved math with schedules of investments. Certainly we expect a decent return or we don\u2019t do it. We use a lot of experience and do it in our heads. We distrust others\u2019 systems [and complex models] and think it leads to false confidence. The harder you work, the more confidence you get. But you may be working hard on something you\u2019re no good at. We\u2019re so afraid of that process that we don\u2019t do it.<\/p>\n

Point 24. On Judging Managerial Talent: (Genuine) Paper Record Is Important If You Add That To Character and Intelligence<\/strong><\/p>\n

How Do You Judge Managerial Talent: the Paper Record or Your Own Judgment?<\/p>\n

And How Did You Judge Eitan Wertheimer?<\/p>\n

The paper record is usually a better indicator of talent . The paper record of this man is so extraordinary that it couldn\u2019t have been created by an ordinary human being. If you add to that the man\u2019s obvious character and intelligence \u2013 who isn\u2019t looking for that?<\/p>\n

You also want to get a fair price of course.<\/p>\n

Eitan said he learned some things from us. He\u2019s one of the smartest men I\u2019ve met in my whole life. I can\u2019t imagine he\u2019d learn anything from me.<\/p>\n

When You Bought Iscar, Did You Consider That One of Israel\u2019s Greatest Companies Is No Longer Israeli Owned and Controlled?<\/p>\n

You gotta understand that these people picked us. All we did was say yes. [Laughter] We think the kind of people who seek us out have such marvelous judgment that they\u2019re the kind of people we want to be in business with.<\/p>\n

Details on Iscar<\/p>\n

That was a very intelligent question and I\u2019m going to give you a very intelligent answer: I\u2019m not going to answer. [Laughter] All I\u2019m going to say is that we are very happy with the acquisition and the price we paid. It\u2019s not rudeness. We want Iscar to be run like it has been in the past. They want to be private and quiet and we have a tradition of respecting this.<\/p>\n

http:\/\/www.valuewalk.com\/wp-content\/uploads\/2014\/05\/Charlie-Munger-2005-2013-minus-Harvard-Westlake.pdf<\/p>\n

Notes from 2006 Wesco Financial Annual Meeting – By Whitney Tilson <\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

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